Will regional operations become the secret sauce for airlines' success?

SpiceJet boss Ajay Singh is mighty pleased with the performance of his airline. Despite a more than 90 per cent load factor, the airline’s yield remained healthy. Yield gives an idea about the airline’s ability to command the price for its ticket and for SpiceJet it was positive despite cut-throat competition on prime routes.

SpiceJet’s better yield despite a 90 per cent load is a result of the higher fare it commands from regional operations. Pricing on some of the routes has actually been reasonably good resulting in much higher yields when compared with key metro routes. “SpiceJet, which has sizeable capacity on such routes, has better yields despite high load factors and heightened competitiveness on metro routes,” SBICaps mentioned in a research report.

Are regional operations becoming the secret sauce of an airline’s success?

Singh believes so and hence he took the bet to aggressively participate in the government’s UDAN scheme, which intends to connect regional cities that are not served by an airline.

Currently, SpiceJet flies on three UDAN routes – Mumbai-Porbander-Mumbai, Mumbai-Kandla-Mumbai, and Hyderabad-Pondicherry-Hyderabad – with the 78-seater Bombardier Q400. "The seats start selling immediately after booking opens, even our team is pleasantly surprised with demand on such routes," Singh says. Initial results on the UDAN routes have shown there is money to be made from regional operations. With proper network planning, an airline can command higher fares flying people from a Tier-III city into its hub in comparison to metro routes.

A fare analysis by travel portal Yatra.com has shown that last-minute fares on the UDAN routes are in fact higher than that between two metro cities. So, while you can book a ticket three days before your journey from Delhi to Mumbai at Rs 4,300, Spicejet commands a last-minute fare of Rs 8,609 on the Mumbai-Porbandar route or an Alliance Air can charge you Rs 10,500 for a last-minute booking on its Delhi-Shimla flight.

“If I’m flying people from Delhi to Kolkata, my ability to get an outsize fare is really bad. I’m flying from two major hubs, and there’s a lot of opportunity for people not to select me,” said a senior IndiGo official. “But if you’re in Pondicherry, Shirdi, and Rajahmundry you need to connect into Delhi to go somewhere else, I think you’re stuck. And that’s the game.” He said explaining the opportunity of flying into smaller cities.

But, despite the initial promise, the regional routes have shown that they can only be sustainable if operated on a large scale. “If you don’t have economies of scale, it is very tough to do this business. Your costs are different in running a five-aircraft operation, vis-a-vis a 50-aircraft operation - the smaller the plane, the more expensive it is on a per-seat basis. The cost of the pilot, crew — everything remains the same,” Singh said.

The economy-of-scale is the reason why market leader IndiGo has entered regional operations with a 50-plane order. Mainly eyeing the regional and industrial clusters, firstly it is playing the game of size. So cities like Rajahmundry and Tirupati will have four to six departures daily connecting it to metros like Chennai, Hyderabad, and Bangalore. Secondly, it has started to give shape to its hub-and-spoke model by connecting the cities to international destinations like Dubai, Muscat, and Singapore through bigger hubs like Chennai, Bangalore, and Hyderabad.

Operating in large scale becomes more important as with two domestic majors competing directly on the regional routes, the profitability from such routes will reduce dramatically. “Incremental capacity deployed by IndiGo on some of SpiceJet’s existing routes may lead to a moderation of yields. While the regional strategy has helped SpiceJet to withstand pricing pressure, it will have to bring down the non-fuel cost structure. The large aircraft order will help in cost improvement,” SBI Caps wrote in a research report in August.

SpiceJet has in fact ordered fifty 90-seater Q400, which Singh believes will bring down the cost of operations. “If you divide that by a lower number of seats, it becomes that much more expensive. It’s any day more profitable to fly a 90-seater than a 70-seater if the cost of operation is similar on both,” he said.

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